Australia and New Zealand Banking Group Limited v Karam

ANZ Bank appealed after the trial judge set aside security documents the Karam family had signed during their footwear company's financial crisis, finding them unconscionable and procured by economic duress. The Court of Appeal allowed the appeal, holding that pressure over conduct that is not unlawful must be judged under the equitable doctrines of unconscionability and undue influence, which require a 'special disability' or 'special disadvantage', not under economic duress.

Charles and John Karam, brothers, built a shoe business from the 1960s under the name 'Karam Bros Footwear', incorporating a company, Larama Pty Ltd, on 14 February 1980. That company was not renamed Karam Bros Footwear Pty Ltd until October 1990. Their bank, ANZ, financed the company's growth over 14 years, taking guarantees from the two brothers and their wives, Diane and Nada, together with mortgages over the family's homes and the factory land at Regents Park. The company later bought and built a larger factory at Ingleburn, and by the early 1990s was in serious financial difficulty. In June 1993, when the company urgently needed further funds to keep trading, the Bank required the Karams to sign an 'Acknowledgment' that the existing securities covered the company's debts. Their solicitor, Mr Marsden, advised them without yet having copies of the earlier security documents. In October 1993 the Karams signed a further cross-deed of covenant. Both the Karams' homes and the Regents Park land were later sold and the proceeds applied to the company's debt. The company failed in 1996, still owing the Bank money.

Did the Bank act unconscionably, or exert illegitimate economic pressure amounting to duress, by making further financial accommodation to the company conditional on the Karams signing additional security documents? Can a claim of 'illegitimate pressure' succeed as economic duress where the conduct complained of is not itself unlawful?

The Court allowed the Bank's appeal and entered judgment for the Bank against all the Karams and the company. It held that where conduct is not itself unlawful, a claim to relief for 'illegitimate pressure' should instead be assessed under the equitable doctrines of undue influence and unconscionable conduct, which require the weaker party to suffer a 'special disability' or 'special disadvantage' in the sense identified in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, or under applicable statute, rather than by extending the doctrine of economic duress. See [62], [66].

Applying this, the Court held that a party's financial difficulty, even if known to the other side, "as in the present case, will be relevant, but not sufficient to establish unconscionable conduct on the part of the stronger party", and that "the greater the financial risk, the greater the justification for increased security", at [68]. The Company's perilous financial circumstances were "not the Bank's doing", so there was no basis for saying the Bank, in a legal sense, subjected the Karams to pressure. It was the Karams seeking further credit, and the Bank was under no obligation to extend it without protecting its own security position, at [95]. The Karams understood what they were signing and did so because they knew it was needed to keep the company trading, at [92]. The trial judge's finding of illegitimate pressure was therefore "not supportable", at [96].

The trial judge had also wrongly treated the company's parlous finances as itself a form of illegitimate pressure, ignoring that the Karams had received legal and financial advice from experienced advisers with the material and time to consider it, at [123]. The cross-deed of covenant and accompanying documents were accordingly enforceable, and the Karams' cross-appeal over the Regents Park sale proceeds was dismissed.